- While yen depreciation supports export revenues, corporate profits and wage growth, …
- … stagnant export volumes and declining real wages still persist
- Our GDP forecast for 2024 has been further revised down to 0.3% from the previous estimate of 0.8%
- We remain doubtful that the BOJ will promptly increase rates during the June and July meetings
- We anticipate the possibility of BOJ scaling back JGB purchase, paving the way for a rate hike in 4Q
GDP disappointment
Preliminary figures for 1Q GDP revealed a larger-than-expected decline of -2.0% QoQ saar (consensus: -1.2%). This downturn was particularly notable in exports (-18.7%), private consumption (-2.7%), and gross fixed capital formation (-1.1%). While the drop in exports marked a reversal from the uptick in 4Q23, private consumption has now dwindled for four consecutive quarters on a QoQ basis.
On a brighter note, government consumption expanded in 1Q (0.8%). Moreover, in nominal terms, GDP still registered a 0.4% QoQ saar increase in 1Q. The GDP deflator remained steady at 2.6% QoQ saar during the same period.
Leading indicators point to a moderate growth rebound in 2Q. April saw the manufacturing PMI rise to 49.6 from March's 48.2, marking its highest level in over nine months since August 2023. The Manufacturing Production Forecast Index also rose 3.3% MoM in April.
The larger-than-expected contraction in 1Q will likely weigh on full-year growth. We have revised down our GDP growth forecast for 2024 to 0.3% from 0.8%. We expect the Bank of Japan to lower its FY2024 GDP growth projection in its July quarterly outlook review (current projection: 0.8%).
Yen debates
The weaker-than-expected GDP performance has raised debates over whether a weak yen benefits the Japanese economy. While the yen’s depreciation bolsters export revenues, exports remained stagnant in real terms between 2021 and 2023 despite the 40% depreciation over the past three years.
Moreover, a weak yen can potentially spur corporate profits and wage increases, but it also accelerates imported inflation. With inflation outpacing wage growth, real wages have declined for two consecutive years. Following this year's spring Shunto, base wages are expected to rise to around 2.5% YoY from 2Q onwards. However, we estimate that a 10ppt depreciation in the yen triggers a 0.3ppt rise in core CPI with a nine-month lag. Consequently, CPI inflation is expected to rebound to 2-3% YoY in 4Q, dragging real wages back into negative territory. Subsequent wage hikes during next year's Shunto may be needed to offset the inflationary pressures.
The government has raised concerns about the recent pace of yen depreciation. Prime Minister Kishida's approval rating declined to a record low of 20-30%, several months ahead of the Liberal Democratic Party (LDP) leadership election in September. The decline in real wages and the weakening purchasing power of consumers could exacerbate the pressure facing Kishida's government.
The Ministry of Finance is suspected to have recently conducted two rounds of yen-buying interventions, totaling JPY9tn on April 29 and May 1. This size was equivalent to the interventions in September and October 2022 (JPY9.2tn in total). The Bank of Japan Governor Ueda also adjusted his tone on the yen following a meeting with Prime Minister Kishida on May 7, highlighting that abrupt and one-sided yen weakening poses uncertainties that negatively impact Japan's economy, contrasting earlier remarks that a weak yen was beneficial for Japan's economy as a whole.
BOJ policy
There has also been a subtle shift in the BOJ tone regarding interest rate policy. During a parliamentary session on May 8, Governor Ueda stated that a monetary policy response might be necessary if yen weakness significantly impacted inflation, contrasting with earlier remarks at the April 26 BOJ meeting that the recent decline in the yen did not immediately affect trend inflation. Whether this signals a substantial change in the BOJ's policy stance or a reaction to political pressures remains unclear.
We doubt that the BOJ will increase rates during the upcoming June and July meetings, given the need to monitor post-Shunto wage data and wage-price dynamics closely. Nevertheless, we anticipate the possibility of the BOJ scaling back JGB purchases at these meetings, potentially paving the way for a rate hike from 0.1% to 0.25% in 4Q. Longer term, the trajectory of interest rate normalisation could outpace market expectations. The terminal rate of the tightening cycle is expected to reach 1.0-1.5%, higher than the 0.75% implied by the 3Y forward rate.
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Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
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